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IRS & NY State Tax Appeals

Being in trouble with the IRS can be a scary, nerve racking, experience. I’ve had many taxpayers (or should it be clients?) recount their sleepless nights of worry to me.

In most cases, a taxpayer’s most troubling encounters with the IRS will occur in either the examination (audit) process, or the collection process. Typically, if your dealing with a revenue agent you’re being audited, if you’re dealing with a revenue officer your case is in collection status. And (most troubling) if you’re dealing with a special agent, the IRS is investigating you criminally.

In any regard, there are ample opportunities to file appeals to either audit or collection actions.

Appealing audits

Audits come in three guises. The correspondence audit, done through the mail, the face-to-face audit where the taxpayer goes to the IRS office, and the field audit, where the revenue agent comes to the taxpayer’s office or home.

Regardless of the type of audit, the process is the same. The IRS agent issues Form 4564 Information Document Request. This is a list of documents that the agent will examine in conjunction with whatever entries on the tax that are under scrutiny. Proof of the expense will be demanded (car and truck, travel, and meals and entertainment are a favorite target). Such proof may be mileage logs, travel itineraries airlines ticket receipts, and so on. Proof that these expenses were paid will also be demanded, such as cancelled checks, credit card statements, and receipts. As far as income goes, the agent may demand all bank statements from all accounts for the years being examined. Sometimes summons for records are issued directly to banks to get the information firsthand.

Also, I’ve seen a disturbing trend lately where the taxpayer’s reported income is compared to a Bureau of Labor report to see if the taxpayer’s income is within an expected range for his or her family size and location.

Once all of this information has been reviewed and the agent’s numerous interview questions have been asked and answered, the audit report will be issued (unless the case goes over to the criminal division).

Generally, the report will list the disallowed expenses and alleged unreported income. The tax, penalties, and interest due will be listed on the bottom line, and the taxpayer will be asked to sign the report, agreeing to it. The IRS is even kind enough to put those "sign here" stickers on the report indicating where it should be signed. If the taxpayer is unrepresented, or just worn out by this intimidating, sometimes humiliating, sometimes greatly adversarial process, he or she may just sign it because that want the nightmare to be over. Unfortunately, signing that report may just be the beginning of the nightmare. That’s why any taxpayer that has gotten this far, without an attorney, should refuse to sign and consult experienced legal counsel. In fact no taxpayer should sign anything the IRS asks you to sign without consulting an attorney first.

The First right to appeal (the 30 day letter)

The administrative appeal

If the taxpayer "doesn’t agree" with the report, the IRS cannot assess the tax against the taxpayer. The agent will then usually issue the so-called 30 day letter. This letter advises the taxpayer, among other things, that they can submit additional information if they don’t agree with the audit, talk to the agent’s manager, or file a protest with the Office of Appeals. How formal the protest has to be usually depends on the dollar amount of the case (how much the IRS alleges is owed).

Once the appeal is filed, the taxpayers will hear no more from the agent. Some weeks to months later the Office of Appeals will send the taxpayer a letter stating his or her case is now in "Appeals" and someone will contact them. Some weeks to months (sometimes years) later, that taxpayer will receive a second letter from Appeals, sent by the particular Appeals Officer (AO) assigned the case. This letter may have a hearing date and time scheduled.

At the appeal hearing the taxpayer will be allowed to argue the case. Generally, arguments about why the auditor was wrong are made, additional substantiation may be submitted, witnesses may offer testimony and so forth. If an amicable settlement cannot be reached, the taxpayer usually will still have the right to appeal the case to the U.S. Tax Court.

The second right to appeal (the 90 day letter)

The Tax Court petition

If the taxpayer does not come to terms with the Office of Appeals, a 90 day letter, known as the Statutory Notice of Deficiency (Stat Notice in IRS speak) is issued to the taxpayer. This letter will be sent the taxpayer’s last known address by certified mail. The taxpayer will have 90 days from the date of that letter to file a petition with the U.S. Tax Court in Washington D.C. If that taxpayer does so, an IRS attorney will be assigned the case.

Some months, or even a year later, the case will be set for trial in front of a Tax Court judge and again the taxpayer can argue the case. The IRS attorney and the taxpayer may still settle the case out of court. If no settlement is reached, the case goes to trial and a federal judge will determine any tax owed.

The most crucial issue concerning appealing audits is the 90 day letter.

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Winspear Law, PLLC

  • 534 Delaware Avenue #426,
    Buffalo, NY 14202

  • 510 Clinton Square #5011, Rochester, NY 14604
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